Bina (he/she?) told me that he/she is misinformed.
With regard to the rest of the article they are wrong to imply that capital gains have been needed to justify negative gearing over the last 30 years. A property purchased 30 years ago, initially with negative gearing, for say $40k would now be returning about $20k a year in rent.
I see your point but the bears tell me, and insist, that rents are set by the renters' ability to pay - not by house prices or costs to the PI. On that basis the rent would be what it is now.
Do I need to worry? With about 1.7 million taxpayers claiming negative gearing deductions, rental property is a point of focus for the Tax Office. Late last year it announced it would contact as many as 100,000 rental property owners this financial year who might have incorrectly claimed tax deductions. So, yes, if you're not 100 per cent sure of your claims, you could have cause for worry. What sorts of mistakes are they looking for? According to Deloitte, common mistakes revolve around when you can and can't claim interest payments.
Deloitte says deductibility is determined by use of the borrowed money rather than the security provided. Interest on funds borrowed for private purposes is not deductible, no matter what is used as security. For example, let's say Mike owns his home outright. He decides to rent it out and borrows to buy a new one using his old home as security.
Deloitte says the money borrowed to buy the new home is for private purposes and therefore the interest is not deductible, despite the fact the property used as security is now rented out. Linked and split loans can also create tax problems. These loans provide finance for both private and investment purposes. Deloitte says they are often marketed on the basis that people can pay off their home loans faster and get bigger tax deductions for interest by paying off their private loan first and letting the interest accumulate on the investment loan. But this might not be the case.
Deloitte says there are two tax rulings on the deductibility of interest on such loans and a more recent tax determination discussed how the anti-avoidance provisions of tax legislation could apply to arrangements that make the payment of interest on the capital sum paid in reduction of the home loan tax-deductible.
Where a loan is used for both investment and private purposes, Deloitte says the interest needs to be apportioned. For example, interest paid on money initially borrowed to buy a rental property but used in part to buy a car or pay off a credit card will not be fully deductible. Only the interest relating to the money borrowed for the investment property will be deductible.
Where a rental property is held in joint names, it says, the interest must be split according to the legal ownership of the property. And where a property is rented to a family or friends at less than a commercial rent, the interest may be calculated on a pro rata basis. Deloitte says another common error is claiming loan repayments as an interest deduction. Deductibility is limited to the interest part of the loan repayment, unless it is an interest-only loan. Voluntary advance payments towards the principal are also not deductible.
Tax breaks for property investors favour richer Australians to the tune of $4.5 billion - but should they be scrapped?
Around budget time each year, and whenever tax reform is discussed, property investors shudder at the thought of the abolition of negative gearing.
At the Federal Government tax summit last year, Grattan Institute economist Saul Eslake called for changes to negative gearing arguing it provided $4.5 billion each year to affluent Australians and reduced the supply of affordable housing.
“We've got a personal income tax system that rewards accumulation of wealth through borrowing and speculating and penalises the accumulation of wealth through working and saving,” he said.
Not that long ago ANZ Bank's Phil Chronican took aim at negative claiming the tax break was leading to an unhealthy focus on housing as a means to get rich, while pushing property prices to unaffordable levels.
Opponents of negative gearing appeal to the frustration of would-be home owners, suggesting they have been locked out of the market by greedy, tax-driven property investors who receive billions of dollars of tax breaks which pushes up property prices. It is sometimes argued that it would be better to use revenue forgone through negative gearing to build more “affordable” homes.
A quick primer:
A property is negatively geared when the costs of owning it - interest on the loan, bank charges, maintenance, repairs and depreciation - exceed the income it produces.
Since the costs of producing an income are generally deductible against the taxpayer’s other income, property investors can effectively offset some of the interest expense against their wages. This has made some argue that other, less fortunate, taxpayers help these property investors meet their costs.
Why would anyone go into a business deal that is expected to make a loss?
Generally it’s because property investors hope that their income losses will be more than offset by their capital gains when they eventually sell their property. And in Australia capital gain is not taxed unless you sell your property, and then it is concessionally taxed; again evoking the argument that it favours wealthy landlords.
Of course negative gearing is more favourable for taxpayers who earn high incomes.
Imagine an investor had excess interest expenses of $10,000. If they were on a marginal tax rate of 15 cents in the dollar they could use their loss and reduce their tax by $1,500. But to a taxpayer in a higher tax bracket, one who pays 30 cents in the dollar tax, they could reduce their tax by $3,000.
So the benefits of negative gearing are greater the more you earn and the higher your tax rate.
What’s the fuss about?
In our modern society we pay our taxes and expect the government to provide us with certain essential services. These include hospitals, roads, schools, jails, public transport, aged care and public housing.
In Australia the government often shares the burden of providing these services with private enterprises that can often deliver them more efficiently and cheaper.
When the government can’t supply enough public hospital beds, private run hospitals step up to the mark and not only receive tax deductions for their business loans, but also allowances to subsidize them. So do aged care providers, schools and public transport providers who provide services in tandem with the government.
Our government also provides public housing, but not enough for all those who can’t afford to buy their own property. While government programs, such as the National Rental Affordability Scheme and other social and public housing programs are helpful, it is only the private rental market that can deliver rental accommodation at the rate and scale that is required at present.
Property investors like you and I save our deposits, buy a property, commit to a loan for 25 or 30 years and provide accommodation for others in our community.
In return we expect to get a reasonable return on our investment risk, just like other business people do. We know that the rent won’t cover our expenses, but accept that certain tax benefits plus the long term capital growth will make up for this.
Sometimes it does, and sometimes it doesn’t.
Leverage and negative gearing compounds returns in the good times, but multiplies losses when property prices are flat or falling. I know as many people who have lost money in property investment as those who have made money. Much like most other small business people.
If the government takes away my tax concessions, I would have to consider my investment options. To ensure I get a decent return I’d put up my rents if I could, or maybe I’d invest elsewhere to get the best bang for my bucks.
The result would be that rents would rise and tenants would have to fight over the few rental properties left, or the government would have to invest it’s own money and buy or build properties and enjoy the pleasures of being a landlord.
Of course the government already provides some public housing, but not enough, leaving the task of providing rental accommodation not only in our capital cities, but also in regional Australia and in the remote mining towns to private investors. People like you and me who have chosen to run our own little property investment businesses.
If we set up a dog wash business or a restaurant, we’d be able to claim a tax deduction for legitimate business expenses including loans to set up our business or purchasing business equipment.
Why should it be different for property investors who take on a business risk?
Hmm... something for the government to think about.
by: Lanai Vasek From: The Australian April 08, 2012 1:34PM
NEW South Wales Opposition Leader John Robertson has called for a debate on negative gearing to help address cost of living pressures in Sydney.
Speaking on Sky News's Australian Agenda program, Mr Robertson said people were “really struggling” with housing affordability in western Sydney and there was little appreciation for the role negative gearing was playing in pushing up house prices for future generations.
“I'd like to see a discussion about looking at changes to negative gearing,” Mr Robertson said.
“Simply looking at things like when people buy their second or third home - the sorts of pressure that that puts on their own kids. Because mostly everyone I talk to is concerned about how their own kids are going to get into the market and there is no real appreciation of what negative gearing is doing in terms of putting pressure on housing prices for their kids to get a first foot in the door.” Rec Coverage 28 Day pass
Negative gearing is a form of financial leverage where an investor borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan. The investor must then fund the shortfall until the asset is sold, at which point a profit is made if the capital gain on the asset exceeds the accumulated loss.
Mr Robertson said he hadn't yet discussed the idea of a debate on negative gearing with the Gillard or O'Farrell governments but believed it should be a priority.
There seems to be a genuine push atm to remove negative gearing. I hope it happens.
As I've said before, they can leave negative gearing in place for current investors and completely remove it or leave it only for new housing moving forward.
Under this scenario it is not likely for rents to increase because current investors will still claim NG.
This will discourage investors from buying existing houses at current prices and yes, prices will fall until they reach a level where rental yields are viable.
by: Matthew Franklin, Chief political correspondent From: The Australian April 09, 2012 12:00AM
WAYNE Swan has ruled out any change to negative gearing arrangements for property investment despite a warning from NSW Labor leader John Robertson that it is driving up property prices and causing hardship for first-home buyers.
Mr Robertson yesterday called for a wide-ranging public debate on the issue, arguing that the cost of living was a serious issue and parents investing in property could be making it harder for their children to break into the property market.
Negative gearing has its benefits but know the risks.
Let's face it: hundreds of thousands of investors are attracted to property because of the tax breaks. According to the Australian Taxation Office, more than 1.1 million people claim negative gearing deductions yearly and receive tax benefits to the tune of $5.5 billion.
Having a negatively geared property allows you to deduct an investment loss from your income, including your salary, but it shouldn't be seen as a panacea for a dud investment choice. There are smart ways to use negative gearing, yet there are also hidden traps that can catch out the unwary and those who don't research thoroughly.
If you borrow to buy a house or unit and the expenses are greater than the income, you are negatively gearing. The ATO gives you back a percentage of this loss, to the extent of your marginal tax rate (that is, if you pay tax at 37 per cent, you'll get back 37 per cent of the loss).
Fledgling investors often seek advice about whether they should use a negative gearing strategy. But negative gearing and positive gearing are not ''strategies''; they are terms that describe a cash position.
An investor's strategy needs to centre on the investment fundamentals, such as selecting the right property in the right area. How to fund it is a separate issue.
For most investors, though, the financial returns rely on long-term capital growth, so the total capital growth must cover the upfront cost of the property, all the holding costs and other fees, such as council rates and stamp duty.
Negative gearing gives you a tax break while you wait out the 10 or 20 years needed to achieve good capital growth.
It's vital at the onset that you find a balance between your cash flow and your investment.
You need to decide early whether you're comfortable paying a $30,000 or a $15,000 shortfall out of your personal cash flow each year.
Also, consider what will happen if you lose your job or your partner stops working.
The risks of negative gearing can be the difference between a good night's sleep and lots of tossing and turning.
There seems to be a genuine push atm to remove negative gearing. I hope it happens.
As I've said before, they can leave negative gearing in place for current investors and completely remove it or leave it only for new housing moving forward.
Under this scenario it is not likely for rents to increase because current investors will still claim NG.
This will discourage investors from buying existing houses at current prices and yes, prices will fall until they reach a level where rental yields are viable.
Maybe there is a push online in forums where young people that cant afford to buy hang out.
I find it highly unlikely that NG will ever be removed. It may trigger housing price falls that would damage the Aussie economy. Why on earth would any politician want to do that?
And don't forget that Australia has a very high stamp Duty which kinda evens out for the NG anyways compared to countries without NG.
Amid news that finding a rental property may have temporarily gotten a little easier with asking rents for units dropping 1.1 per cent during the first three months of the year, comes a warning that the easing won't last.
Dr Andrew Wilson, the senior economist at Australian Property Monitors, says ongoing shortages of accommodation, low levels of new supply and continued inactivity by investors, will lead to upward pressure on rentals this year.
APM figures show weekly asking rents for units either fell or were steady across all capital cities in the first three months of the year.
Median weekly asking rents for houses remained unchanged in Sydney, Melbourne, Brisbane and Perth.
Minor relief was handed to house renters in Canberra with a 2 per cent fall, and in Adelaide to a lesser extent, where the asking rent for houses dipped 0.6 per cent.
The ongoing tight rental situation has led to renewed calls from two experts for the Federal Government to take a fresh look at negative gearing.
Dr Chris Martin, a senior policy officer at the Tenants' Union of NSW, says bluntly: "There's a bunch of things that could be done to negative gearing that would go some way to changing what it currently does to our housing system, which is screw up house prices and distort the rental market to the disadvantage of low-income renters.
"We have such a large number of landlords who have small holdings, typically most of them [own] only one property, and they are amateur speculators," Martin argues.
"They are more interested in being able to sell the place when they judge the time is right to either realise gain or lever up into some new, even higher-value property. And so their ... strategy, depends on being able to get vacant possession when it suits them.
"Even more than our renting laws, it's the nature of our landlords and their strategy that makes renting as insecure as it is."
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